HDB Or Bank Loan? Which Should You Be Taking When You Buy Your Home?

This is a common question that most Singaporeans will ask themselves when they purchase their first HDB flat. DollarsAndSense looks at whether you should be taking an HDB loan or a bank loan when you buy your flat.

In this case, there simply isn’t a correct answer. Your decision should hinge on your situation. Not to fret, we will shed some light on how to decide which loan you should be taking.

What Is A HDB Loan?

Most people would have heard of an HDB Loan. If you are an owner of an HDB flat, there is a good chance that your mortgage loan was taken from HDB.

In the grand picture of nation building and home ownership, the HDB loan plays a significant role. Countries that promote home ownership usually have a government supported home financing scheme. The purpose of such a scheme is to provide financing for citizens looking to purchase a home. For example, in the US, Freddie Mac is a public government-sponsored enterprise. In Singapore, HDB assumes that role via its disbursement of the HDB Loan.

To take an HDB Loan, there are some conditions that applicants need to meet.

1. At least one applicant must be a Singapore citizen

2. Total household income cannot be more than $12,000

3. Have not taken 2 or more HDB concessionary interest rate loans

4. Only applicable for HDB Flats (new or resale)

The HDB concessionary interest rate is pegged at 0.1 percentage point above the prevailing CPF interest rate. As of today, the interest rate stands at 2.6% per annum.

An HDB loan would allow you to borrow up to 90% of the purchase price or value of the flat, whichever is lower. Before the disbursement of the loan, you will first need to use up all the money in your CPF Ordinary Account (CPFOA). HDB will then provide the loan based on the remaining amount you need.

Bank Loan

A bank loan has less restrictions put on you. There is no income ceiling and you do not need to clear off money from your CPFOA before applying for it.

Unlike HDB loans, mortgage rates for bank loans are typically pegged to the Singapore Interbank Offered Rate (SIBOR). That means you pay the SIBOR plus a spread (which is the profit the banks made).

Which Should I Take?

From a personal finance perspective, the main difference between the two is how they are priced.

While the HDB Loan is pegged to the CPFOA interest rates, bank loans are pegged to the SIBOR rates.

One way to make a decision is to choose the interest rates that you think would be lower over the course of your loan.

Historical Rates For 3-Month SIBOR

Year

INTERBANK

3-MONTH

2000

2.81

2001

1.25

2002

0.81

2003

0.75

2004

1.44

2005

3.25

2006

3.44

2007

2.38

2008

1.00

2009

0.69

2010

0.44

2011

0.38

2012

0.38

2013

0.40

In contrast to the volatile SIBOR rates, CPFOA interest rate has been fixed at 2.5% since 2000.

Comparison Between The Two

Most banks will raise their spread after the first 3 years on a mortgage loan. For today, let’s just assume they play nice and keep their spread to a reasonable 1% throughout the duration of the loan (although this is never the case). How do the two compare?

The 3-month SIBOR rate is 1.13% as of the time this article was written.

Also, note that a person taking an HDB loan can switch over to a bank loan. If you take a bank loan however, you cannot switch over to a HDB loan.

On average, the bank loans appear to have a slight edge (2.38% vs 2.6%). Of course, this is based on our assumption that the spread is 1%, which will most likely not be the case. In addition, we are not including any financing cost, which may be incurred each time you refinance your mortgage.

Even in this extremely low interest rate climate, the difference between the historical 14-year average is quite close. Taking into consideration that you will defintely incur refinancing costs every three years or pay higher spreads after the initial three-year duration on bank loans, we don’t see a great deal of benefit opting for it. From a personal finance point of view, the volatility in bank interest rates on a home is not worth taking given our mortgages are 20 to 25 years long.

The idea here is that most of us should have stable income, and if you are disciplined enough, a stable monthly expenditure inclusive of your mortgage repayment as well.

Certainty in interest rate and the convenience of knowing that you do not need to go searching to refinance your mortgage every 3 years should be an assurance we prefer. And just think about the time and grey hairs saved not having to worry every three years.

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